01 September 2017

• TD posted operating EPS of $1.51 in Q3/17, up 19% YoY and ahead of both our forecast ($1.38) & consensus ($1.36). In what we viewed as one of the strongest performances of Q3/17 earnings season for the sector (right up there with NA), the historical strong suits of TD were very much on display as the bank benefited from the combination of robust all-bank operating leverage (+5.2%), net interest margin (NIM) expansion in both Canada (+4bp) and the US (+9bp), and pristine credit quality metrics (core provision for credit losses [PCL] ratio down to 33bp). With the common equity tier 1 (CET1) ratio now at ~10.7% pro forma the Q4/17 closing of the Scottrade Bank acquisition, TD has updated its normal course issuer bid (NCIB) to allow for the purchase of an additional 20m shares (15m share program was completed in March).

• After the 3% increase in our estimate TD shares trade at 11.4x our 2018E, a 2% premium to the sector avg. of 11.2x and 4% back of RY. In upgrading TD to a SO-rating in our Aug. 21 report we espoused the view that a return to form in a few of the key operating fundamentals of the bank would allow it to regain its premium P/E and narrow the valuation gap with RY. Candidly, we think the Q3 print was a very good first step in this regard, and we expect TD shares to continue to make up ground in the interim.

• A healthy dose of conservatism in our 2018E. Although a 3% lift to our forward estimate is not small within the confines of the large Canadian banks, we think we have been conservative in getting to our EPS. To wit, our new $5.90 mark for 2018E implies $1.48 per qtr., which is actually less than what TD just posted in Q3/17. While Q3 did feel like a result in which many variables broke right for the bank (big NIM expansion, flat non-comp costs, PCL at the low-end of the target range), on the call mgmt. stopped short of saying that they viewed the print as unsustainably strong. Bottom line, the bias to our estimates is clearly to the upside, particularly given the leverage that TD has to higher rates as a result of its stronger core deposit franchises in Canada and the U.S.

• Across the sector, credit quality trends look very healthy. Q3 marked the second consecutive quarter in which the core PCL ratio at TD migrated into the low-30bp range, in-line with our view that the bank had greater capacity than most peers for credit costs to move lower. With the underlying trends looking healthy for TD across its various portfolios, we have lowered our PCL assumptions and now have the bank averaging a core PCL ratio of 37bp in 2018E and 38bp in 2019E.

__________________________________________________________

The Globe and Mail, James Bradshaw, 31 August 2017

Toronto-Dominion Bank put an exclamation point on a strong third quarter for Canadian banks with a 17-per-cent leap in profit fuelled by strong results in Canada and the United States.
All six of Canada's biggest banks surpassed analysts' expectations for the quarter that ended July 31, riding a surging domestic economy to better results.

With profit climbing 14 per cent higher in its retail banking arms on both sides of the Canada-U.S. border, TD stood out from a group of outperformers. The bank also enjoyed lower loan losses and strong capital generation, and announced that it intends to extend an existing plan to return capital to shareholders by buying back as many as 20 million more shares if regulators approve.

"I feel good about our performance at this stage of the year," chief executive officer Bharat Masrani said on a Thursday conference call. "This outperformance is partly attributable to a more favourable operating environment in the U.S., and more recently in Canada."

But even as the banks are riding high, TD chief financial officer Riaz Ahmed sounded a note of caution on the economic forces that have allowed banks to grow faster than even they predicted. Housing activity has been slowing while the Canadian dollar strengthens, and there remains uncertainty about the outcome of trade negotiations with the United States and Mexico.

"The Canadian economy has been surprisingly strong, but when you look forward, there's a number of headwinds that need to be taken into account," Mr. Ahmed said in an interview. "I would expect the growth rate to moderate a little bit."

TD's profit for the third quarter was $2.77-billion, or $1.46 a share, up from $2.36-billion, or $1.24 in the same quarter last year.

Adjusted to exclude certain items, TD earned $1.51 a share. Analysts surveyed by Bloomberg had estimated that TD would earn only $1.36 a share.

Revenue was $9.3-billion, or nearly 7 per cent higher than a year ago.

Profit from the bank's core Canadian retail division, which includes wealth management, topped $1.7-billion for the third quarter, up from $1.5-billion a year ago. The increase was mainly due to revenue growth and lower insurance claims.

TD's performance in retail banking in the United States also pushed forward, with profit reaching $901-million, compared with $788-million in the third quarter of 2016. That increase came in spite of a "sentiment of uncertainty" that Mr. Ahmed acknowledged has taken hold in the United States, as promised changes to trade and tax policies remain in limbo. But in the east coast markets where TD is concentrated, "business conditions seem to be good and activity is robust," he said.

Interest-rate hikes in the United States and, more recently, in Canada have also helped.

"TD showed the strongest beat of the 'Big 6' this earnings season, coming in well ahead of expectations," said John Aiken, an analyst at Barclays Capital Canada Inc., in a research note. "Its U.S. platform continued its upward earnings trajectory and its domestic retail operations saw a step up in its profitability after being mired in lower growth over the past few quarters."

Profit from the bank's capital markets arm dipped 3 per cent from a year earlier, to $293-million. But revenue from lending and trading grew, and the decline was due mostly to investments in the bank's U.S. dollar businesses. The unit also faced a tough comparison with TD's results from the same quarter a year ago.

"If you look at the last nine quarters, [$293-million is] the second-highest outing we've had," Mr. Ahmed said. "The fact that it's a mathematical 3-per-cent decline is not something that worries me."

The climate for credit has been almost universally described as benign this quarter, and TD's provision for credit losses – the sum set aside to cover bad loans – fell to $505-million, from $556-million a year ago. Loan losses were lower across the bank's credit card, personal lending and auto lending portfolios, and the bank had fewer provisions for the oil and gas sector in its capital markets arm.

TD's common equity tier 1 ratio – a key measure of a bank's capital levels – rose to 11 per cent, from 10.4 per cent a year ago, setting the stage for TD to boost the size of its share buyback.

"Our capital generation has been quite strong," Mr. Ahmed said. "We thought it made sense to reward our shareholders and pay some of that back."